Are subsidies good or bad for India?

Is subsidy a good thing for India, or is it bad? Does it help the poor, or only the rich? Worse, as is sometimes said, does the so-called “culture of subsidy” promote idleness?

To reach an honest answer to these questions, the reader should perhaps first tackle a counter-question, an introspective one: “How many of my relatives and friends have benefited from subsidised higher education?”

How many of them are doctors, graduating from a government medical college, having paid fees as low as Rs 6,000 a year (as in AIIMS, Delhi), for a course that would have cost several lakhs in a private college? How many are engineers, with the same levels of fee-discounted education? Or is maybe even a product of a top-notch general college (as in Presidency, Kolkata), with an annual fee of Rs 2,000, and received an education that prepped him or her for a shot at a US university on scholarship? An estimated 130,000 Indian students are today enrolled in American colleges, it would be interesting to see how many of those on scholarships have benefited from subsidised college education back home – and then stayed on to get US citizenship.

As more than a fifth of the population is below the official poverty limit, subsidies in India are given for a variety of reasons, and in a variety of sectors.

Advantages of subsidies in India include making items of daily need more affordable, such as food or fuel; create an employable pool of educated Indians who would contribute to GDP growth (subsidised education); provide a leg-up to certain sectors, or boost industrialisation in under-developed areas through tax exemptions.

And there is no precise, cut and dried answer to the question whether subsidy is good or bad – it depends on what subsidy one is talking about. Ambiguity arises if subsidy is debated on an "ethical" plane; rather, the question ought to be asked in an “economic” sense: whether subsidy is fulfilling the role it was designed for. The subsidy amount, after all, comes out of the taxes you and I pay.

Prime Minister Narendra Modi recognises this when he says the need of the hour is to plug the leakages in the subsidiary chain, not the policy per se.

And nowhere is misuse more pronounced than it is in fuel subsidies. It is a fact recognised by various international organisations as well.

Fuel Sops

In a report on how subsidised fuel eluded the targeted beneficiaries, the Washington, DC-based non-profit Oil for Change (OIC), says that in developing countries such as India, it was common for the prized commodity to be diverted to uses other than for which the subsidy was intended.

In a report titled, “Fossil Fuels Don’t Benefit the Poor”, OIC says subsidised consignments frequently crossed borders, or were sold on the black market, or were used for less efficient end-uses.

Taking the case of India, OIC referred to an on-the-ground survey that the Delhi-based non-profit Vasudha Foundation conducted in eight states, and found that “almost every policy design, budgetary allocations and subsidies in India intended to benefit the poor, end up benefiting primarily the well-off sections of the society.”

This was compounding the continuously poor state of India’s rural energy infrastructure, OIC says.

In electricity subsidisation, where the generation is dependent on coal, oil or gas, subsidies assist households that are already connected to a grid. In India, OIC says, this accounts for only about 56% of the population.

“Gasoline and diesel subsidies in India benefit people who own cars or other vehicles. In this case, poorer households simply cannot afford the car, let alone the fuel,” OIC notes.

It also quotes from Vasudha’s findings to observe this was equally true for other energy fuels such as liquefied petroleum gas (LPG) and kerosene, “with the urban rich being the major beneficiaries of these subsidies with very little trickling down to the rural population.”

Pro-Rich?

Do the rich end up reaping the advantages of subsidies in India? Magsaysay Award winning journalist P Sainath lays this bare in an incisive article some years ago, pointing out that in the budget for 2013-14, the then Indian Finance Minister P Chidambaram wrote off Rs 48,635 crore in customs duty for the gold, diamonds and jewellery sector alone.

It was one of “the biggest write-offs,” that was “not quite the province of the aam aadmi or aam aura”, Sainath quipped. What was worse, he says, citing budgetary figures, this waiver was “greater than what was written off on vegetables, fru­­its, cereals and vegetable oils”.

And this was not a one-off largesse either; duty write-offs on gold, dia­­m­onds and jewellery totalled Rs 1.67 lakh crore over the 36 months spanning the 2011-14 period.

Dissecting the UPA performance in this regard over nine years from 2005-06 to 2013-14, Sainath shows India Inc “on average received Rs 7 crore every hour (or Rs 168 crore every day)” in write-offs on just direct corporate income tax alone.

“And that for nine years running,” he notes. “Longer, but we only have data for those nine years. And that’s if we look only at corporate income tax.”

The amount quadruples if one were to take into account write-offs on customs and excise. The provisional figure written off for the corporate sector was Rs 5,72,923 crore, or Rs 5.32 lakh crore, excluding personal income tax, which covers a relatively wider group of people.

Sainath points out this is about four times the “under-recoveries” (fuel subsidies) reported by the oil marketing companies in 2012-13.

Desirable Subsidy

Does this mean all subsidies are being given at the wrong places, and that there is no good being served? Far from it, subsidies on public transport have made travelling affordable for millions of people, apart from reducing pollution and congestion on roads, as well as cutting down on petrol consumption.

“Desirable subsidies” would include the rural employment generation scheme NGERA, midday meal programmes, healthcare, female empowerment, funds allotted for the right to education among the poor, and agricultural loans.

In short, any subsidy that benefits women, the poor and the marginalised is good; their growth propels national growth.

Subsidies in India on medical equipment or medicines ensure healthcare for the poor that is otherwise bedevilled by a rickety rural healthcare infrastructure. Moreover, policy incentives for pharma will help make India a hub of affordable treatment, like it is in ITES.

Similarly, subsidies for loans given for secondary agriculture initiatives reduce the burden on primary agriculture activities, and also help whittle down disguised unemployment in the agri-sector.

The MSME sector is the backbone for any economy and in India, it accounts for 37% of the GDP. Subsidy here will not only strengthen this sector but also ensure jobs for millions as well.

Subsidies for renewable energy usage at public places and in residential areas, is much desired; solar subsidy, duty exemptions on imports of expensive equipment, and incentives for green fuels like bio-fuels will propel investment in R&D and drive towards a more eco-friendly energy regime. These are just some of the advantages of subsidies in India, which when done right will positively affect the lives of citizens who are in real need.

In his New Year’s address to the nation, Prime Minister Modi announced a slew of goodies that places a huge burden on the banks, but also extends much-needed a helping hand to the poor and the middle-class. These include:

Enhancement of lending to the poor, the youth, the unemployed and the marginalised sections from the deposits that have accumulated on account of demonetisation in an effort to create a more secure future for them;

An 8% assured rate of interest to senior citizens on their deposits;

Loan write-offs for farmers;

Larger volumes of credit to small and medium enterprises;

Enhanced credit guarantee for small businesses;

A 4% cut in the interest rate on housing loans up to Rs 9 lakh, and

A 3% cut in housing loans up to Rs 12 lakh.

In addition, every pregnant woman will get Rs 6,000 in her bank account; the announcement takes forward the promise of the Food Security Act of 2013.

Now to answer the question raised earlier – is subsidy good or bad for India. Subsidy is good when it meets its purpose, which is to benefit the poor. However noble the intentions maybe, the benefits can be maximised only when the subsidies are transparent, focused, and designed to plug leakages.

Modi has promised us he would work towards that. Now we just have to wait and see!